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FRM Part II · FRM Exam Part II · Integrated Risk Management

A review of several institutional failures finds that each had risk reports showing the problem, yet senior management took no action. The risk function had no direct access to the board and its head was paid less than business heads. Which lesson from these failures is best supported?

The best-supported lesson is that the independence, stature and authority of the risk function matter as much as report quality. Here the problems were identified but ignored because risk lacked board access and standing, so more complex models or business-owned reporting would not solve the failure.

  1. ARisk measurement was insufficiently quantitative, so more complex models are needed
  2. BRisk function independence, stature and authority matter as much as the quality of the information producedCorrect
  3. CRisk reports should be shortened to a single metric to ensure action is taken
  4. DBusiness heads should own risk reporting to avoid duplication

Explanation

The information existed but was not acted on, and the risk function lacked board access and standing. This points to independence and stature of the risk function. Complexity and single metrics do not fix an authority problem, and business ownership of reporting undermines independence.

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